Paragon Mortgages MD Calls for BTL Code of Practice

by Mark Alexander

11:36 AM, 5th December 2013
About 7 years ago

Paragon Mortgages MD Calls for BTL Code of Practice

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Paragon Mortgages MD Calls for BTL Code of Practice

John Heron, the Managing Director of Paragon Mortgages has been a good friend of mine for several years. Despite this I don’t agree with everything he has said in a paper he’s recently published calling for a Code of Practice for private sector BTL landlords.

To quote from his paper, Mr Heron said ….

John Heron Managing Director Paragon Mortgages

John Heron Managing Director Paragon Mortgages

“I have argued passionately for many years that buy-to-let is not a consumer product, that buy-to-let borrowers are financially sophisticated property investors and that they do not need the level of protection afforded to consumers under MCOB.”

The typical client of Paragon Mortgages may well fit this description, however, many people who enter the BTL market certainly don’t intend to own large property portfolio’s or treat BTL as their full time profession. They are just normal hard working folk who don’t trust pensions and the stock market and are looking for a home for their retirement nest egg. Many others become landlords because they move in with new partners and rent their former home as opposed to selling it. These people are consumers to my reckoning and deserve consumer protection. If things go well for these people and they go on to buy a few more properties does that make them sophisticated investors and if so at what point?

There has never been a definitive legal case which defines a landlord as a consumer. The closest I’m aware of was the case of OFT vs Foxtons which argued that a contract issued by the letting agent was unfair based on the Unfair Consumer Contract Terms Act 1999. The case was upheld which demonstrates that a landlord can indeed be treated as a consumer. However, there was no definition as to what circumstances would constitute a consumer landlord.

Some mortgage lenders base their lending criteria very much on a persons ability to support BTL mortgages from their earned income. These lenders tend to limit their criteria to financing only a handful of properties. The Principality Building Society are a very good example of this as they will not lend to a landlord who owns more than five properties. I would argue they are a consumer based lender.

The flipside to the above is The Mortgage Works who don’t pay much attention at all to their borrowers personal income and place far more emphasis, in terms of lending criteria, on the cashflow of the property/portfolio they are being asked to lend against.

I would like to see the industry develop a clear definition of what constitutes a consumer vs a professional/sophisticated landlord and for that to become a backdrop to lending criteria. Number of properties alone would not be a good enough benchmark in my opinion. If a person earning £25,000 a year was to inherit £250,000 and purchase a portfolio of 10 properties worth £1 million could they really be deemed to be sophisticated investors?

For landlords to be treated as “sophisticated investors” for funding purposes I also believe they should have a better than average understanding of what being a landlord is all about, whether they choose to outsource the management of their property portfolio’s or not. Basic knowledge can be obtained very efficiently though the landlord accreditation courses which are now run by the larger landlords associations.

Why don’t mortgage lenders who target landlords owning multiple properties make it part of their criteria only to lend to accredited landlords? Surely that would reduce their risk too?

I do agree with many of the other points made in John Heron’s paper which also touches on BTL mortgage funding being abused to purchase homes which would be deemed unaffordable on a traditional home owner mortgage basis.

You can read John Heron’s full article by completing the simple form below (available to Property118 members only – you must be logged in to see the form).

I am also interested in reading your comments, so my question is; what are your thoughts on this?

Oops! We could not locate your form.

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Shakeel Ahmad

11:23 AM, 6th December 2013
About 7 years ago

A consumer is one who consumes goods or services. It therefore irrelevant whether he/she is financially sophisticated or not.

Financial sophistication has already been discussed at great length so no comments on this front.


11:37 AM, 6th December 2013
About 7 years ago

I think there are at least two separate issues.

The distinction from the tenants point of view between professional and amateur is spurious. The correction measure is how well does a landlord comply with his obligations,.

I am worried lenders are trying to build a distinction so they can sell products to some landlords they consider to be "professional" that are complexed and not fully explained. Then lenders will try to argue there exists parity of understanding or bargaining power when they are challenged.

Adam Hosker

11:55 AM, 6th December 2013
About 7 years ago

@shakeel ahmad My mortgage business Consumes Pen's and Paper Ahmed. It is though not a consumer in the view of the Law - it simply has a contractual agreement with Staples. Whom consumes vast quantity of pens from BIC but again is not a consumer but has a contractual agreement with BIC.

A consumer is not one that consumes, it is an individual acting for personal reasons. Not business purposes - a simple distinction is do you have customers (tenants) then its a Business.

@Brian - I tend to disagree that it happened because it was unregulated. You agreed to the terms of the contract and in heinsight should have consulted a solicitor. Also the "bad bank" has repossessed 8,847 homes in 2010 alone - those are residential and buy to let.. The residential ones are regulated.

@Reader - that is kind of the situation now. You are expected in law as a business to take advice from a 3rd party.. They can sell complex products now if they so desire.

Regulated tends to mean Advised as in you should have the product explained and tested to ensure its suitable.. BTL is not regulated.

Jerry Jones

11:56 AM, 6th December 2013
About 7 years ago

Reply to the comment left by "Reader " at "06/12/2013 - 11:37":

Quite. I note that BoI (or was it WB?) have only been attempting to shaft B2L borrowers so far - they have been treating Resi borrowers far more fairly. I'd oppose giving lender any excuse to do more of the same by introducing the concept of sophistication.

Mark Alexander

12:10 PM, 6th December 2013
About 7 years ago

Reply to the comment left by "Jerry Jones" at "06/12/2013 - 11:56":

BoI didn't distinguish between consumers at all, their tracker mortgage rate hike hit landlords and residential borrowers alike.

It is the west Brom who are only targeting "landlords owning multiple properties" (3 or more) and their reasons for doing this are assumed to be to escape consumer regulation but even that is not certain.

Therefore, consumer or not, it's not really going to help you that much if your mortgage lender tries to play dirty tricks on you.

PS - in my opinion the regulators are about a useful as a chocolate fire-guard. They didn't stop any of the mis-selling scandals we hear about, they didn't prevent the collapse of Northern Rock or the resultant credit crisis and they didn't prevent the LIBOR manipulation scandal either. Need I go on?

Shakeel Ahmad

12:22 PM, 6th December 2013
About 7 years ago

A consumer may or may not enter a contract. As such he/she becomes a party to the contract by this fact he/she becomes a consumer.

Andy Bell

12:59 PM, 6th December 2013
About 7 years ago

I consider myself to conduct my responsibilities as a Landlord in a professional manner. However I have chosen not to maximise my earnings potential as a Landlord by talking all opportunities to levy charges or increase rents. Some may class this as being un-professional. The term "Professional Landlord" is meaningless to me. I have also derived most of my income from employment and self employment.

I may class myself as a "somewhat sophisticated investor" because I run spreadsheets and do some analysis before purchasing an asset. I also have the ability and willingness to negotiate a price and as an investor in property I am probably more sophisticated the average man in the pub. However these are personal, "consumer" transactions with no more sophistication than haggling for a barging at an antique fair that I might be able to turn a profit on at some time in the future (and subject to capital gains).

I can not class myself as a "sophisticated borrower" or "sophisticated user of financial products". In this respect I am no more sophisticated than anyone who borrows from their own high street bank or who follows the advice of an Financial advisor in the back room of an estate agents. I take a good look at the prices, read what it says on the tin and pick a product off the shelf. In this respect I consider myself as buying a consumer product as a consumer just like everyone else in the shop.

I would only class someone as sophisticated in this respect if they had the ability to negotiate on equal terms with the lender to provide a bespoke, individual product. In this case both parties would hold equal status for drafting of the terms of any contract. One would assume that an individual with the "net worth" high enough for this kind of deal would take independent legal advise.

But hey, that's just common sense and not the Law (YET?)

Mark Alexander

13:18 PM, 6th December 2013
About 7 years ago

Reply to the comment left by "Andy Bell" at "06/12/2013 - 12:59":

That's a very good point Andy, some contracts with Private Banks are indeed negotiable. In my broking days I managed to get default terminology changed and interest/LTV covenants amended or even struck out completely for high net worth clients. As previously mentioned, Private Banks generally tend to be open exclusively to "sophisticated investors". Mortgage lenders are sophisticated investors/borrowers but only a very minute percentage of BTL landlords could ever be described in this way.

Adam Hosker

14:04 PM, 6th December 2013
About 7 years ago

Its not really what "you" consider yourself. The FCA in its Policy Statement PS 13/13 considers you NOT a "retail investor" if you are having an annual income of more than £100,000 or having inevitable net assets of more than £250,000.

In such events they expect you will take advice and not rely on the salesman.

Mark Alexander

15:08 PM, 6th December 2013
About 7 years ago

Reply to the comment left by "Adam Hosker" at "06/12/2013 - 14:04":

Thank you Adam, that's the statement I've been looking for. On that basis the same criteria could be applied to a "consumer landlord" couldn't it?

Presumably, a person with investable assets of £250,000 or an income of over £100,000 is considered to be a "sophisticated investor" by the FCA? Could this become the basis for the future of BTL lending I wonder?

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